vGUPPI: Scoring Unilateral Pricing Incentives in Vertical Mergers

Serge Moresi, Charles River Associates (CRA) and Steven C. Salop, Georgetown University Law Center explore vGUPPI: Scoring Unilateral Pricing Incentives in Vertical Mergers.

ABSTRACT: One key concern in vertical merger cases is input foreclosure. Input foreclosure involves raising the costs of competitors in the downstream market, which could in turn increase the sales and profits of the downstream merger partner. In this article, we explain how the upward pricing pressure resulting from unilateral incentives following a vertical merger can be scored with vertical Gross Upward Pricing Pressure Indices (“vGUPPIs”). These vGUPPIs are derived from an economic model where upstream firms sell differentiated inputs to downstream firms which in turn sell differentiated products. There are separate vGUPPIs for the upstream and downstream merging firms and, in addition, vGUPPIs for the rivals of the downstream firm whose costs are raised. Our model also explains how the vGUPPIs can account for potential input substitution and merger-specific elimination of double marginalization. These vGUPPIs are analogous to the horizontal GUPPIs commonly used for the evaluation of unilateral effects in horizontal mergers. Like the horizontal GUPPIs, the vGUPPIs provide more direct evidence on unilateral pricing incentives than other metrics commonly carried out in vertical merger cases, such as concentration indices and vertical arithmetic. They also are simpler to implement and require less data than merger simulation models.